The Challenge of Improving the Long-Term Focus of Executive Pay
David I. Walker
Boston University School of Law
April 29, 2009
Boston Univ. School of Law Working Paper No. 09-22
A consensus is developing that executive compensation in the U.S. is inadequately linked to long-term company performance, resulting in reckless, short-term decision making. Congress, the Obama administration, and academic commentators have recently embraced dramatic restrictions on the form and holding period of senior executive pay, at least at some companies. A common view, apparently, is that while regulation of the amount of executive pay would do more harm than good, regulation of form and term is desirable.
This essay questions that view. It highlights the challenges of fruitfully regulating the term and form of pay arising from the complexity and diversity of executive pay arrangements, uncertainty as to the underlying reasons (and hence appropriate remedies) for short-termism, and the conflict between deterring reckless short-term behavior and encouraging sufficient risk-taking to maximize share value over the long term. This essay goes on to analyze and critique existing regulatory proposals, and, while not endorsing a regulatory solution, offer two ideas that policy makers should consider if faced with the job of crafting a regulatory response to short-termism: focusing regulation solely on the term of pay, leaving form to individual company discretion, and adopting a comprehensive disclosure-based response.
Number of Pages in PDF File: 32
Keywords: executive compensation, short-termism, stock options, restricted stock
JEL Classification: G34, J33, K22, L51, M52
Date posted: April 29, 2009 ; Last revised: October 27, 2009